Markets wanted central bank easing and EU money printing or
further loans to troubled nations. It was as if markets had given
up on hopes for genuine economic improvement. Indeed good US data on Thursday that reduced QE
3 hopes and so was said to hurt markets. Part of the reason
markets sold off Thursday was that once the easing news was out,
that exhausted the current supply of good news, thus encouraging
profit taking.

Einstein’s Definition of Insanity – Case Study

Please correct me if I’m wrong, but I believe it was Einstein who
defined insanity as expecting a different result from the same
action under the same circumstances. Prior stimulus actions
(as distinct from US guarantees of bank deposits to calm panic
and avoid bank runs in the wake of the Lehman collapse) appear to
have done little but temporarily prop up asset prices, at cost of
more debt, risk of currency debasement, and excessively low rates
that have not revived the economy but have greatly hurt pension
funds, insurance companies, and anyone else (like an entire
generation of savers) trying to accumulate savings for
retirements. We won’t even discuss how these low rates have
exacerbated underfunding of municipal pension funds and
contributed to the growing list of municipal bankruptcies.

As noted in the past, we find this belief that more stimulus is
bullish, that further easing is a good thing, difficult to
understand for anyone except very short term traders seeking to
play very short term moves. Here’s why.

We’re in a balance sheet recession – few want to borrow, and few
banks want to lend. Most households and businesses want to reduce
debt and build cash cushions against the uncertainties of a
slowing global economy (which was well confirmed by the past
week’s data and central bank easing). Most banks are trying to
rebuild battered balance sheets by retaining cash obtained for
virtually no interest and investing it almost risk free for
higher rates. In sum, lower rates aren’t going to increase
borrowing, velocity of money flowing through economies, etc, so
why bother? We suspect the reason, as much as anything else, is
to appear to be doing something. Sad.

These hopes continue to be a factor, and Friday rumors of coming
QE were credited for helping US markets to bounce off of session
lows and cut their losses.

Suspicion that easing suggests hidden weakness than is currently
priced into markets pressures markets Thursday

Encouraged by downbeat comments from ECB head Draghi and weak
China data earlier in the week, markets became suspicious that
the central bank easing suggested that the Chinese, EU, and UK
economies were weaker than widely believed, and this concern was
widely cited as a cause for lower markets on Thursday.

Note how despite widespread easing markets did not respond as
positively as in the past, suggesting that many share my
suspicion noted in part 1 above.

3. Economic Data

It had no affect Monday or Tuesday bad PMI data helped ironically helped risk assets
because Fed QE 3 hopes, but good data hurt Thursday because it
dampened those same hopes.

4. Technical Resistance

Major indexes nearing technical resistance Thursday helped
dampened the short covering rally that had been ignited by hope
for central bank and EU action. Central banks did take expected
action, but with indexes at technical resistance levels, this
resistance contributed to a ‘sell the news’ reaction to the
central bank moves Thursday

5. US Jobs Reports Disappointment

This drove European and US risk markets lower. Ironically,
disappointment was greater because figure wasn’t considered bad
enough to ensure new QE 3 per some analysts, though others think
it was bad enough. Given

Ramifications and Conclusions

So in retrospect, what did we get? Besides another week older and
deeper in debt? Nothing much changed, except that each week
closer to a major sovereign state or bank default that will
eventually happen, without any mechanism in place to prevent that
default from causing an ever spreading wave of defaults that
quickly moves beyond our means to control. Greece is the most
likely first default, though the big concern is preventing
destabilization of the EU banking system, or any of the larger EZ
members like Spain, Italy, or (let’s face it) France or even
Germany.

As my colleague Mitch Feierstein point out in his
book Planet
Ponzi, the system is leveraged enough so that even a Lehman Brothers collapse, with about $129
billion in net liabilities, $768 billion in gross liabilities,
was enough endanger everything. So it wouldn’t take too many
sovereign or bank defaults in the EU to easily surpass the risks
posed by the Lehman insolvency

Thus our advice remains unchanged, including shorting risk assets
as EU euphoria based rallies lose momentum, particularly those
most tied to the EU, like the EURUSD. I could go on, but time
constraints force me to stop here. On now to our weekly preview
on coming week market movers. Looks like there’s a lot to
discuss, and it’s already 2 am here in Jerusalem.

SPECIAL ALERT- Coming Podcast and Transcript: The Basic What,
Why, and How of Attaining Currency Diversification

Most people have almost everything tied to just one or 2
currencies – that’s probably the most widespread investor
mistake. Here’s an intro to avoiding it with simpler, safer ways
than commonly associated with most forex trading.

I’ll be on a live podcast Tuesday July 17 on
www.moneyradio510.com, 12 noon EST. The recording will be
available from July 18-24 on the homepage via the archives link,
and after that on www.thesensibleguidetoforex.com, along with a
transcript for those preferring to read it.

DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL
PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES
SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE
WOULDN’T BE TELLING YOU FOR FREE, NOW WOULD WE?